Wednesday, November 13, 2013

The Stock Market Has Become Insane

Common calculations of aggregate ‘wealth’ take the entire stock of an asset class and multiply it by the bubble prices, on the theory that financial value is what you can sell something for.  Of course, some clever or lucky individuals succeed in selling at the bubble highs, but the aggregate bubble prices can never be realized by sale.  As soon as any very great number of the owners of a bubble asset try to sell it, the bubble collapses, the evanescent “wealth” disappears, and the long-term trend reasserts itself  - Alex Pollock, Resident Scholar at the American Enterprise Institute

I was chatting with someone earlier about how the current market reminds me of the tech bubble in 1999-early 2000.  The NASDAQ peaked a little over 5,000 in March 2000.  There were maybe a few lucky souls who sold at the top but anyone else who claimed to do so is lying to cover up the accidents in their 401k's.  Then I looked to see where the Naz is right now and I discovered it was a shade below 4,000.  I stopped watching the Naz a long time ago because it reminds me of the penny stock markets in Denver and Salt Lake of the 1970's.  Mostly fraudulent.

Then I looked for comparative purposes at the S&P 500 futures, as I was watching it ramp higher today unceasingly in the last hour to close up over 13 points (close to 1%) despite opening the day down about 9 points.  No news or fundamental reason for the ramp.  Unless you consider the Federal Reserve's money printing program to be of fundamental value.  Hmmmm, let's see.  The Fed issues 1 dollar and it's a one banana world, so it costs $1 to buy the banana.  Then the Fed issues another dollar but there's no more bananas produced and I'm hungry so the guy who has the banana charges me $2 dollars.  I felt wealthier when I had $2, but it still cost me $2 to buy the banana.  That's an absurd simplification, but that's basically what the Fed is doing.  You call that value-added?  You call that wealth creating?  In it's most simple-to-understand form it's "inflation."

We might not see the immediate affects of inflation tomorrow when we go buy food at the grocery store, because those dollars being printed are piling blindly and foolishly into the stock market.  Why?  Because the demand for mortgages for buying homes and refinancing existing mortgages is quickly disappearing, so all that printed money has to go somewhere. It was previously going into cheap mortgages used to buy homes to flip.  That game is over now.  The housing bubble is popping. Here's where the money IS going:

If you think there's any semblance of fundamentals driving this market other than massive quantities of Fed "cheese," then please review the graph I posted on the upper right side of this blog.

Now, for those of you who think that you'll have the discipline to hold on until this thing peaks, then I will tell you that in 1999 when the Naz was at 3000 and I thought that was the peak, it ran up another 66% from there.  Could that happen with the SPX?  Sure.  But also know that in January 1923 the German stock market index was 21,400.  By November 13, 1923 it had run up 26,890,000.  Don't blink or rub your eyes, you can look it up.  Then on November 14, 1923 the German billionaires woke up and found themselves destitute, as the German Government revalued the mark at 1 for 1 billion.  Your billion in the stock market was now worth 1.  You didn't even get a chance to sell.

Don't think that won't happen here, because it can and probably will.  And you better pray that's how this grand Keynes/Volker/Greenspan/Bernanke/Yellen experiment turns out, because the alternative is that the U.S. starts a world war (we've heard that before, twice when Germany ruled the globe) because China is the country that forced the revaluation of the dollar.  If you want to see how that ends, read "The Road."  Just remember:  Arbeit macht frei...


  1. Several years ago I read an interview with ex Fed Chairman Paul Vocker where he
    was asked in hindsight if he would have done anything differently in handling the
    crisis of the 19970 when interest rates got close to 20%. He replied the only thing he
    would do different would be to hold down the price of gold. Obviously Bernanke heeded
    that advice which has resulted in western gold reserves being dumped at give away prices.
    The law of unintended consequences strikes again.

  2. But the problem is that if the stock market nosedived, PMs would probably go down with it for a period of time. It would be very difficult for me to believe that PMs could held up in a stock market crash. Preemptive strikes on PMs would be implemented for sure.

    1. Be aware that as gold moves from west to east, gold's value will no longer be determined by the Comex or the LBMA. Shanghai gold exchange opens in 2014 and all contracts traded will be settled in gold. Add that gold inventory continues to be depleted at an accelerated rate and miners not producing and higher gold prices follow. When the SHTF gold will go into hiding and higher demand and lack of supply will create the higer price effect. For the record I'm not rooting for any of this(higher P.M. prices) because the social ramifications will supercede any large financial gain made by P.M. holders.

  3. How JPMorgan's Latest PR Stunt Blew Up In Its Face

    Skeptical Economist @SkepticalEcon

    Can I buy a Credit Default Swap on my own Chase credit card debt? #AskJPM #milliondollarideas #CDS
    Retweeted by JV


  4. JPMorgan’s Fruitful Ties to a Member of China’s Elite

    To promote its standing in China, JPMorgan Chase turned to a seemingly obscure consulting firm run by a 32-year-old executive named Lily Chang.

    Ms. Chang’s firm, which received a $75,000-a-month contract from JPMorgan, appeared to have only two employees. And on the surface, Ms. Chang lacked the influence and public name recognition needed to unlock business for the bank.

    But what was known to JPMorgan executives in Hong Kong, and some executives at other major companies, was that “Lily Chang” was not her real name. It was an alias for Wen Ruchun, the only daughter of Wen Jiabao, who at the time was China’s prime minister, with oversight of the economy and its financial institutions.

    JPMorgan’s link to Ms. Wen — which came during a time when the bank also invested in companies tied to the Wen family — has not been previously reported. Yet a review by The New York Times of confidential documents, Chinese public records and interviews with people briefed on the contract shows that the relationship pointed to a broader strategy for accumulating influence in China: Put the relatives of the nation’s ruling elite on the payroll

  5. You write great, informative articles filled with great deatail. I don't think you're given the credit you're due.

    The bust will happen from various sectors all at once. That's going to be a problem when everything starts unloading the garbage in the system. I expect to see a pre-FDR USA in 5-10 years as there's no way we can finance any of his programs with they way we keep increasing our debts. Senior citizens are going to get road-kill on this and they are already hurting as it is.
    It's the riots from welfare/food stamps crowd that will get ugly - especially when no one can buy drugs from their local dealer. Because so much has been "borrowed" on those programs (or given out to people who have never contributed to the system), it has to all go bust.

  6. Where's The Inflation? Dr. Mark Thornton Will Tell You

    Mises called this process: “the acme of the short-run principle.” The first receivers of the Fed's digits get to live it up in "the short run". This is, of course, done at the expense of everyone else. Our loss of purchasing power is their gain.

    However, the dying Keynesian idea has not, and will not, change the economics of the big picture.

    We started with Rothbard, now let's end with him:

    “What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel rich for the moment, but clearly all we are doing is diluting the money supply.”

  7. Platts System Could Be ‘Prone’ to Collusion, EU Official Says

    Platts’s oil-price reporting system “could be prone to collusion or distortion,” according to the European Union official in charge of the benchmark probe that led to raids on the premises of BP Plc (BP/), Royal Dutch Shell Plc (RDSA) and Statoil ASA. (STL)

    “The mere set up could be prone to collusion or distortion because it doesn’t take much to basically have strange reporting” by companies that participate in the pricing system, Celine Gauer, director at the European Commission’s antitrust unit for the energy industry, said today at a conference in Brussels.

    It takes at least a year to review all the documents garnered during and after raids in cases such as the oil probe if the commission plans to open a formal investigation, Gauer said in an interview. Reviewing documents can go faster if the EU decides not to open a formal probe, she said, emphasizing that her comments today were in a personal capacity.

    The commission also raided the premises of Abengoa SA and Argos Energies in May looking for evidence in relation to the markets for crude oil, refined oil products and biofuels. Gauer’s comments come after four longtime traders in the global oil market said in a U.S. lawsuit that the prices for buying and selling crude are fixed.

    The EU probe is still examining two areas of concern -- abuse of dominance and unlawful collusion, Gauer said.
    Offers, Bids

    Platts has assessed prices for crude oil, petroleum products and related swaps using its market on close process since 2002 in Europe. Traders voluntarily report bids, offers and trades to Platts through e-mails, instant messages and phone conversations in a defined window period each day, which are then used to create end-of-day price assessments for various commodities, including crude oil and ethanol.

    “Very often you see that it is not that many transactions or bids and offers that are reported on a day-to-day basis,” Gauer said. “On the basis of these trades, Platts develops independently, or so it seems, its price benchmark.”

  8. Fed Policy & the Business Cycle

    Last June Mr. Bernanke said the dip in inflation was transitory, yet as of September Harmonized U.S. CPI growth was already lower than in the Eurozone, and very close to levels that triggered the ECB rate cut last week.